There’s big news out of Henderson Global Investors, a massive UK-based investment firm that manages about $95 billion of assets. Henderson reports that globally distributed dividends (that is, all companies across the globe issuing dividends) hit $288.1 billion in Q3. The largest increases are coming from Asia-Pacific (except Japan), Europe, and emerging markets.
But the U.S. is where growth has particularly exploded. More than 74% of the S&P 500 companies beat estimates this quarter, ahead of the 67% achieved over the past year.
There was 3.8% increase in headline dividend growth in the third quarter, and underlying dividend growth of 9.7%. Underlying growth reflects movements in currency, and special dividends.
The financial sector, in particular, has been pumping out increasing dividends.
What exactly is going on … and will it continue?
To understand what’s going on, you have to go back to the financial crisis of 2008-09. During this period, there was a massive liquidity and credit crunch. Companies were forced to pay down debt, and conserve cash. On top of this, since consumers were devastated, most businesses had to expect massive downturns in revenue. As a result, drastic cost cutting was instituted across every sector.
A funny thing happens when a company is forced to cut costs to levels never previously experienced. Suddenly, the company realizes it never needed all those expenses in the first place. They are getting by just fine on more modest expenditures. They find new efficiencies and new ways of making workers more productive.
So as things returned to normal, companies found ways to keep those cuts in place. Revenues began to filter back in, increasing net income at those companies.
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A virtuous spiral was born. As net income increased, companies had more money to return to shareholders. Additional profits no longer had to support the previously higher level of expenses, including labor. With five million people having left the workforce since 2009, that is five million people no longer being paid.
There’s another trend favoring increased dividends, and that’s historically low interest rates. With bond yields at levels that do little for retirement and income investors, that same demographic has been pushed further out on the risk curve to find the yields they desire.
Companies are recognizing that gap, and thus funneling their excess cash into dividends. As a result, yield hunters are enticed to move money formerly allocated to bonds into stocks that offer these enhanced dividend payouts.
The trend of increased dividend payouts is likely to continue. The economy is slowly improving. With the decline in oil prices, consumers will have more money to spend on things other than gasoline. Even energy companies have fantastic balance sheets and cash flow so they are unlikely to cut dividends. Meanwhile, other companies will see a lift in revenue from reallocated consumer spending, meaning higher profits, and more money for dividends.
Eventually interest rates will climb and bonds will become attractive again. Until then, however, dividend-paying stocks — particularly U.S. ones — are the best place for income seekers.
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